Chapter 12 INVESTMENT ANALYSIS TABLE OF CONTENTS INVESTMENT ANALYSIS ...........................................................................................12-3 Examination Objectives .......................................................................................12-3 Associated Risks ..................................................................................................12-3 Overview ..............................................................................................................12-3 Examiner Resources .............................................................................................12-4 Policies .................................................................................................................12-4 Examination Guidance .........................................................................................12-10 Classification of Securities SFAS 115 .................................................................12-10 Broker-Dealer Analysis ........................................................................................12-11 Audit ....................................................................................................................12-14 Safekeeping ..........................................................................................................12-14 Records ................................................................................................................12-17 Investment Valuation ...........................................................................................12-18 Bond Basics .........................................................................................................12-18 Principal ...................................................................................................12-19 Coupon Rate.............................................................................................12-19 Day Count Basis .......................................................................................12-20 Accrued Interest .......................................................................................12-20 Price Quotations .......................................................................................12-20 Yield Quotations ......................................................................................12-21 Investment Products .............................................................................................12-22 US Treasury Securities .............................................................................12-22 Treasury Bills ...........................................................................................12-22 Treasury Notes and Bonds .......................................................................12-23 Treasury Zeros or STRIPS .......................................................................12-23 Other US Guaranteed Securities ..............................................................12-24 Federal Agency Securities ....................................................................................12-24 Government Corporations ........................................................................12-24 Government Sponsored Enterprises .........................................................12-25 Obligations ...............................................................................................12-26 Participations............................................................................................12-26 Secondary Participations ..........................................................................12-27 GNMAs ....................................................................................................12-28 SBA Guaranteed Loans ............................................................................12-31 Zero Coupon Bonds .................................................................................12-31 SMBS .......................................................................................................12-32 IOs and POs .............................................................................................12-32 CMOs .......................................................................................................12-35 INVESTMENT ANALYSIS REMIC .....................................................................................................12-37 IRPS 98-02 ...............................................................................................12-37 Divestiture of Securities ...........................................................................12-40 Residual Interests .....................................................................................12-41 Fair Values ...............................................................................................12-41 Investment in Mortgage Notes .................................................................12-42 Mutual Funds, Common Trusts, Unit Trusts .......................................................12-42 Legality of Fund .......................................................................................12-43 Characteristics and Risks .........................................................................12-43 Fees ..........................................................................................................12-44 Unit Investment Trusts .............................................................................12-44 CUSOs .................................................................................................................12-45 Federal Funds .......................................................................................................12-45 Credit Risk ...............................................................................................12-46 Corporate Credit Unions ......................................................................................12-46 Other Credit Unions .............................................................................................12-47 Other Shares, Deposits, and Certificates ..............................................................12-47 Thrift Shares and Bank Deposits .............................................................12-47 Time Certificates of Deposit ....................................................................12-48 Deposit Notes ...........................................................................................12-52 Bank Notes ...............................................................................................12-52 Eurodollar Deposits .................................................................................12-53 Yankee Deposits ......................................................................................12-53 Bankers’ Acceptances ..............................................................................12-53 Mutual Savings Banks, State Banks, Trust Companies ...........................12-53 Loans to Other Credit Unions ..............................................................................12-54 State and Municipal Obligations ..........................................................................12-54 Repurchase Transactions......................................................................................12-54 Commitments to Purchase or Sell Securities .......................................................12-55 Standby Commitment ..............................................................................12-55 Cash Forward Agreement ........................................................................12-56 Short Sale .................................................................................................12-56 Pair-Off Transactions ...............................................................................12-56 Reverse Repurchase Transactions ........................................................................12-56 Adjusted Trading .................................................................................................12-58 Impermissible or Unsuitable Investments ............................................................12-59 Investment Trading ..............................................................................................12-60 Workpapers and References .................................................................................12-61 GLOSSARY OF INVESTMENT TERMS - APPENDIX 12A .......................................12-63 REVIEWING THE AUDIT OF DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES, AND INVESTMENTS IN SECURITIES – APPENDIX 12B.................12-99 Definitions............................................................................................................12-99 Overview ..............................................................................................................12-99 References ............................................................................................................12-104 INVESTMENT ANALYSIS Chapter 12 INVESTMENT ANALYSIS Examination • Determine adequacy of the credit union’s investment policy, procedures, and internal Objectives controls • Assess legality of investments and compliance with related regulations, accounting procedures, and other guidelines • Evaluate suitability of the investment portfolio in relation to the credit union’s business plan, asset-liability management (ALM) strategies, liquidity, and net worth position • Determine fair